What is the term for the calculation of the point at which total revenues equal total expenses?

• A. Profit margin
• B. Budget variance
• C. Break-even analysis
• D. Cash flow forecast

Answer: (C)

Understanding when a business covers all its costs comes down to break-even analysis. It answers the question of the sales level at which total revenues equal total expenses, leaving zero profit. By separating costs into fixed (do not change with volume) and variable (change with volume) and using the contribution margin (price minus variable cost per unit), you can find the point where fixed costs are fully covered. In practice, you calculate break-even in units as fixed costs divided by the contribution margin per unit, or in dollars as fixed costs divided by the contribution margin ratio. This tool helps with pricing, production planning, and assessing whether a venture is feasible. Other concepts—profit margin, which measures profitability per sale; budget variance, which compares planned versus actual results; and cash flow forecast, which projects timing of cash—don’t pinpoint the exact sales level needed to cover costs.